2009 Index of Economic Freedom

Quick Facts

Population:

• 4.4 million

GDP (PPP):

• $17.8 billion
• 9.4% growth
• 8.3% 5-year compound annual growth
• $4010 per capita

Unemployment:

• 13.6%

Inflation (CPI):

• 9.2%

FDI Inflow:

• $1.1 billion

Georgia's economic freedom score is 69.8, making its economy the 32nd freest in the 2009 Index. Its overall score is 0.5 point higher than last year due to improvements in business freedom, trade freedom, and freedom from corruption. Georgia is ranked 19th out of 43 countries in the Europe region, and its overall score is higher than the world average.

Georgia scores well in business freedom, labor freedom, trade freedom, fiscal freedom, and government size. Bureaucratic regulation is not excessive, and the labor market's flexibility and freedom are exemplary. The top income and corporate tax rates are low, as is the overall tax burden. Georgia has reduced its average tariff rate. Foreign investors have nearly full market access, with the exception of a few key sectors.

Georgia has made great progress in liberating its citizens from economic constraints but is still below world averages in property rights and freedom from corruption. The judicial system remains inefficient, and stepped-up corruption-related prosecutions and firings have not affected the public perception of persistent corruption.

Background Back to the top

Georgia became independent with the collapse of the Soviet Union in 1991 but has suffered from civil wars and secessionist movements. President Mikheil Saakashvili, politically dominant since February 2005, won presidential and parliamentary elections in 2008, but the opposition disputes both outcomes. Georgia was one of the Soviet Union’s better-performing regions, and its economy contracted significantly following independence. It has adapted to a market system, and recent economic growth has been strong. Georgia has benefited from oil transit revenue since completion of the Baku–Tbilisi–Ceyhan oil pipeline from Azerbaijan to Turkey, but Russia has subjected Georgia to economic sanctions since 2006. Russian military incursions in late 2008 and the continued presence of Russian troops in Abkhazia and South Ossetia in the guise of peacekeepers have created a crisis, threatening political and economic stability.

Business Freedom 86.6 Back to the top

The overall freedom to conduct a business is relatively well protected under Georgia's regulatory environment. Starting a business takes an average of three days, compared to the world average of 38 days. Obtaining a business license requires less than the world average of 18 procedures and 225 days. Closing a business is relatively simple.

Trade Freedom 80.6 Back to the top

Georgia's weighted average tariff rate was 4.7 percent in 2006. Georgia has made significant progress toward liberalizing its trade regime, but some import restrictions, agriculture subsidies, some import and export licensing, and inadequate infrastructure and trade capacity still add to the cost of trade. Some border trade goes unreported. Ten points were deducted from Georgia's trade freedom score to account for non-tariff barriers.

Fiscal Freedom 86.8 Back to the top

Georgia has a moderate income tax and a low corporate tax. The top income tax rate is a flat 25 percent, and the corporate tax rate is 15 percent, down from 20 percent as of January 2008. Other taxes include a value-added tax (VAT), a tax on interest, and a tax on dividends. In the most recent year, overall tax revenue as a percentage of GDP was 21.7 percent.

Government Size 74.6 Back to the top

Total government expenditures, including consumption and transfer payments, are moderate but increasing. In the most recent year, government spending equaled 29.1 percent of GDP. Privatization of state-owned enterprises is winding down, and proceeds are being used to offset social welfare and defense spending increases.

Monetary Freedom70.9 Back to the top

Inflation is relatively high, averaging 9.1 percent between 2005 and 2007. Prices are generally set in the market, but the government may impose controls through state-owned enterprises. It also provides subsidies for agricultural products and energy. Ten points were deducted from Georgia's monetary freedom score to adjust for measures that distort domestic prices.

Investment Freedom70.0 Back to the top

Foreign and domestic investments receive equal treatment. Exceptions may be made for investments in certain sectors, including maritime fisheries, air and maritime transport, and broadcasting. The state retains a controlling interest in air traffic control, shipping traffic control, railroad control systems, defense and weapons industries, and nuclear energy. Foreign firms may participate freely in privatizations, though transparency has been an issue. Residents and non-residents may hold foreign exchange accounts. There are limits and tests for international payments and current transfers; capital transactions are not restricted but must be registered. Foreign individuals and companies may buy non-agricultural land. Only domestic entities may buy agricultural land, but agricultural land can be purchased by forming a Georgian corporation that may be up to 100 percent foreign-owned.

Financial Freedom60.0 Back to the top

Georgia's financial sector has undergone substantial liberalization. Beginning in the 1990s, the central bank assumed a supervisory role and imposed stringent reporting and capital requirements that led to the closure or merging of a number of banks. Total banking assets reached approximately 48 percent of GDP in 2007. Georgia's six largest banks account for about 90 percent of total assets and deposits. Loans to the private sector have increased rapidly in recent years. Foreign bank branches and subsidiaries are welcome to operate in Georgia, and there are no formal or effective barriers. The government does not have a financial stake in any bank. Significant informal transactions undermine the banking sector to some degree, and the stock exchange is small and underdeveloped. In March 2008, the Georgian Parliament approved the Global Competitiveness of the Financial Services Sector Act to enhance the sector's efficiency.

Property Rights35.0 Back to the top

Judicial corruption is still a problem despite substantial improvement in efficiency and fairness in the courts. Both foreigners and Georgians continue to doubt the judicial system's ability to protect private property and contracts. The enforcement of laws protecting intellectual property rights is weak.

Freedom From Corruption34.0 Back to the top

Corruption is perceived as significant. Georgia ranks 79th out of 179 countries in Transparency International's Corruption Perceptions Index for 2007. The government has improved its performance in fighting corruption; it has fired thousands of civil servants and police, and several high-level officials have been prosecuted for corruption-related offenses.

Labor Freedom99.4 Back to the top

Highly flexible labor regulations enhance employment opportunities and productivity growth. Rules on the number of work hours are very flexible. The non-salary cost of employing a worker can be moderate, and dismissing a redundant employee is costless.